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EU Enlargement
Blessing or Curse?
Arne Henning
Julia Albrecht
Luzi Kahn
Tom van Ommen
Prof.: C. San Juan
2008
Agenda
• Introduction
• EU-25: Economic Implications
– Labour Market
– Welfare System
– Budget
• Further Enlargement EU-27
• Conclusion
EU Enlargement – Blessing or Curse?
Historical Overview of the EU
EU Enlargement – Blessing or Curse?
Part 1 of the 5th Enlargement
1. Cyprus
2. Czech Republic
3. Estonia
4. Hungary
5. Latvia
6. Lithuania
7. Malta
8. Poland
9. Slovakia
10.Slovenia
EU Enlargement – Blessing or Curse?
EU 25
01. May 2004
Part 2 and Future Enlargement
Acceding Countries 2007:
Bulgaria, Romania EU-27
Candidate Countries:
Croatia, The former Yogoslav
Republic of Macedonia, Turkey
Potential Candidate
Countries:
Albania, Bosnia and
Herzegovina, Serbia and
Montenegro, Kosovo
EU Enlargement – Blessing or Curse?
Criticism on Enlargement
• Labour mobility leads to fear of
migration
• Unequal distribution of the budget
 some countries benefit more than
others
• Gaps in National Incomes
EU Enlargement – Blessing or Curse?
National Incomes
EU Enlargement – Blessing or Curse?
Labour Market / Welfare System
• Economic Theory
• The Accession Treaty/Transitional
Agreements
• Current Situation
• Future Outlook
EU Enlargement – Blessing or Curse?
Labour Market: Economic Theory
The Effects of Labour Mobility: The Three-factor Model
EU Enlargement – Blessing or Curse?
Labour Market: Economic Theory
The Three-factor Model is based on unrealistic
assumptions:
• No free movement of labour in the real world
• No smooth convergence of wage levels (cost of adjust)
• Problem of unemployment and job replacements
Fears of Migration and generally exploitment of welfare
benefits
EU Enlargement – Blessing or Curse?
The Accession Treaty
• Reducing barriers to cross-border migration
• Allowing migrants same rights as domestic citizens
• Member states can make exemptions:
Transitional Agreements (2-3-2 model) gives member
states the possibility of restricting the free movement of
labour for a transitional period of up to 7 years
EU Enlargement – Blessing or Curse?
Migration Inflow
Stock of CEEC residents in the EU 15 member states
EU Enlargement – Blessing or Curse?
The Accession Treaty
Transitional Agreements:
Source: Journal of European Social Policy (2004)
EU Enlargement – Blessing or Curse?
Current Situation
• In general, flow of workers has been rather
limited
(Ireland: 3.8%, Austria: 1.4%, remaining
members: below 1% of working age population)
• Workers' mobility has had positive effects
• Countries who have not applied any restrictions
(Ireland, UK and Sweden) have experienced
high economic growth, a drop of unemployment
and a rise of employment
EU Enlargement – Blessing or Curse?
Current Situation/2
• In the other 12 EU member states migrated
workers have contributed to a smooth
integration into the labour market.
• Nevertheless, some countries faced undesirable
side-effects
• The preceding lifting of the mobility restrictions
is expected to cause only slight increases in the
movement of labour
Still, adjustments on their labour and welfare
system are indispensable
EU Enlargement – Blessing or Curse?
Future Outlook
Necessary Reforms:
• Labour Market:
more labour mobility friendly institutions,
unemployment insurance of short duration, less
employment protection
• Welfare System:
Raising social welfare standards of new member
states, building up a pan-European safety net
• Adoption of a EU-wide migration policy
These measures are essential to successfully integrate the
new member states
EU Enlargement – Blessing or Curse?
Current Budget
What‘s the budget?
• The EU budget funds
• EU policies
• The expenditure of all the EU institutions
• It is limited
• By agreement of all the Member States  Treaties
• Spending is voted by the European Parliament and Council on a
Commission proposal
• The European Parliament signs the agreed budget into law
• The revenues come from
• Import duties, VAT (value added tax), and from the Member States (% of
GDP with exceptions e.g. British rebate)
The EU budget cannot be in deficit!
EU Enlargement – Blessing or Curse?
Some important Numbers
•
Amount of money made available to the Union
• Ceiling at 1.24% of the Union‘s gross national income
• Comparison: about 45% of the Union‘s GNI goes to national,
regional and local public expenditures in the Member States
•
Annual budget for 2006
• 112 billions (1.01% of the GNI of the enlarged EU)
•
Expenditures
• € 121 190,91 million (commitment appropriations)
• € 111 989,61 million (payment appropriations)
EU Enlargement – Blessing or Curse?
Expenditure 2006
EU Budget 2006
(€ 121 billion)
Competitiveness and
Cohesion (39%)
Other
expenditure
including
administrative
expenditure (6%)
Natural resources:
Agriculture (36%),
Rural development
and Environment
(11%)
The EU as a global
partner (7%)
EU Enlargement – Blessing or Curse?
Citizenship,
freedom, security
and justice (1%)
Change in Expenditure
Budget 2005  2006
Description
1.
2.
3.
4.
5.
6.
7.
Agriculture
Structural operations
Internal policies
External action
Administration
Reserves
Pre-accession strategy
Budget 2006
Change
(%)
50 991 020 000
35 639 599 237
8 889 218 143
5 369 049 920
6 656 369 817
458 000 000
2 892 850 000
48 464 850 000
32 396 027 704
8 016 662 269
5 476 162 603
6 292 367 368
446 000 000
3 286 990 000
5,21
10,01
10,88
– 1,96
5,78
2,69
– 11,99
1 073 500 332
1 304 988 996
– 17,74
111 969 607 449
105 684 048 940
5,95
8. Compensation
Total Expenditure
Budget 2005
EU Enlargement – Blessing or Curse?
Pre-accession instruments
Specific targeted financial aid
• For Acceding countries
• Candidates
• Potential future members
Objective
• Support efforts to enhance political, economic and
institutional reforms
EU Enlargement – Blessing or Curse?
Timeline
1989:
Creation of the Phare program
1997:
Reorientation of Phare towards a total ‘pre-accession’ focus
1999:
Creation of SAPARD and ISPA
Until 2000:
Countries of the Western Balkans were also beneficiaries
 now the CARDS program is providing financial assistance
July 2000:
Turkey receives pre-accession assistance via similar but
different instruments, budget lines and procedures
May 2004:
New Member State must take over the full responsibility for
the management of the Phare program through a process of
Extended Decentralization
EU Enlargement – Blessing or Curse?
Phare
•
Phare funds focus entirely on the pre-accession priorities
•
Objectives
• Strengthening public administrations and institutions to function
effectively inside the EU
• Promoting convergence with the EU‘s extensive legislation
(the acquis communautaire) and reduce the need for transition periods
• Promoting Economic and Social Cohesion
•
Coverage
• Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia,
Slovenia, Bulgaria and Romania
EU Enlargement – Blessing or Curse?
ISPA
Instrument for Structural Policies for Pre-Accession
• Aim:
Enhance economic and social cohesion in the
applicant countries of Central & Eastern Europe
• Main features:
• Only finances major environmental and transport
infrastructure projects
• Annual budget for the 10 countries in 2000-2006
was € 1.04 billion
• Beneficiaries:
• Bulgaria, Romania, and Croatia (since 1st January 2005)
EU Enlargement – Blessing or Curse?
SAPARD
Special Accession Programme for Agriculture & Rural
Development
•
Aim:
Help the 10 countries deal with the problems of the
structural adjustment in their agricultural sectors and rural
areas, as well as in the implementation of the acquis
communautaire [set-up the administration to menage the CAP]
•
Main features:
•
Only finances agricultural and rural development measures
•
Overall annual budget of € 560 million
EU Enlargement – Blessing or Curse?
IPA  2007-2013
Instrument for Pre-Accession Assistance
• Aim:
Prepare the candidate counries better for the
implementation of structural and rural development funds
after accession
• Main features:
• It will replace the 2000-6 pre-accession financial
instruments Phare, ISPA, SAPARD, the Turkish preaccession instrument, and CARDS
• Will concern the countries with (potential) candidate
status
EU Enlargement – Blessing or Curse?
Future
Draft Council conclusions on the budget guidelines for 2007
• The budgetary procedure for 2007 will be marked by 2
important elements
1. Maintaining a framework of overall budget discipline
•
The EU budget for 2007 should provide sufficient resources to
implement the various policies effectively and efficiently
2. Good collaboration between the Budgetary Authority and
the Commission
• Forthcoming of the IIA (Interinstitutional Agreement)
EU Enlargement – Blessing or Curse?
Future
5. Sufficient margins must be maintained
6. Appropriations for 2007 should reflect real and welldefined needs
7. Improvement of the implementation of the EU budget
•
Implementing rules and guidelines (explicit and simple rules)
8. Tight grip on payment appropriations
•
Should be sufficient but not overestimated
•
Efforts to deliver better forecasts
9. Continued improvement of <<Activity Based Budgeting>>
EU Enlargement – Blessing or Curse?
Future
10. Presentation of information to facilitate the transitions
between the Financial Perspective 2000-06 and 2007-13
11. Important elements in preparing the budget
12. Stick to these guidlines!
EU Enlargement – Blessing or Curse?
Future  Recent Agreement of Parliament & Council
•
Based on the meeting of march 22nd on the financial perspective
•
European Parliament
•
•
Wants to add an extra 12 billion euro on top of the 862.4 billion euro
budget for the timeframe of 2007-2013 (agreed upon at the EU
summit in December 2005)
•
Extra 12 billion € are necessary to fund policies with a high
community added value like education, research, trans-european
networks and crossborder cooperation.
•
Additionally, they would like to increase the funds for the flexibility
instrument in the budget  used for unforeseen eventualities
Problems to reach definite solution: Austrian finance minister KarlHeinz Grasser proposes that a number close to 1.5 billion is much more
realistic than 12 billion of additional funds
EU Enlargement – Blessing or Curse?
Winners
• The 10 new member countries:
• Will benefit from billions of € of development aid
between 2007 and 2013
• However, they will receive less than Luxembourg
proposed in June 2005
• The UK sacraficed part of its rebate, but now the UK,
France and Italy will be making equivalent net
contributions
• In the past, the UK‘s net contributin has been much
higher
EU Enlargement – Blessing or Curse?
Losers
• The UK is under pressure to agree to cuts in its
rebate
• When the UK won the rebate in 1984 it was one of the poorest
countries in the EU, but now it is one of the richest
• France did not want to allow even the possibility of a
change to farm spending before 2014
• Budget review does leave open this possibility (France
will have veto power)
• French contributions to the EU budget will rise more
sharply than Britain‘s
EU Enlargement – Blessing or Curse?
Bulgaria-Economic Profile
• Functioning market economy since 2002
• Macroeconomic stability
Implementation of Structural Reform Program
• Improvements made, Challenges remain:
–
–
–
–
External deficit
Attractiveness of business environment
Completion of privatisation
Flexibility of labour markets
EU Enlargement – Blessing or Curse?
Economic Profile
EU Enlargement – Blessing or Curse?
Steps towards the EU
May 1990:
Agreement on Trade and Cooperation; PHARE Programme
Mar 1993:
Europe Agreement for Bulgaria and Interim Agreement on
Trade and Related Matters (replacing the Trade and
Cooperation Agreement)
May 1995:
The first meeting of the Bulgaria - EU Association Council
Dec 1995:
Decision to apply for EU membership – application presented
to the European Council in Madrid
Dec 1999:
The European Council in Helsinki decision to start negotiations
with Bulgaria, Latvia, Lithuania, Slovakia, Romania and Malta
Feb 2000
-Jun 2004:
Accession negotiations
25 Apr 2005:
Accession Treaty signed in Luxembourg
11 May 2005:
Bulgaria ratified the Accession Treaty
1 Jan 2007:
Accession
EU Enlargement – Blessing or Curse?
Romania – Economic Profile
• Functioning market economy since 2004
• Broadly maintained macroeconomic stability
 Implementation of Structural Reform Program not vigorously in
all fields
• Some progress on critical issues, but further challenges:
– Pace of disinflation
– Current account deficit
– Prudent fiscal policy
 Strengthen revenue base
– Continuation privatisation
EU Enlargement – Blessing or Curse?
Economic Profile
EU Enlargement – Blessing or Curse?
Steps towards the EU
1974
Romania’s inclusion in the Community's Generalised System of
Preferences
1980
signing of the Agreement on Industrial Products
1991
signing of the Trade and Co-operation Agreement
Feb 1993
signing of the Europe Agreement
Feb 1995
entrance into force of the Europe Agreement
Jun 1995
application for EU membership
Dec 1999
Helsinki European Council’s decision to open accession
negotiations
Feb 2000
formal beginning of the accession negotiations
Dec 2004
closure of the accession negotiations
25 Apr 2005
signing of the Accession Treaty in Luxembourg
1 Jan 2007
planned accession date; delay by 1 year possible
EU Enlargement – Blessing or Curse?
(Potential) Candidate Countries
• Croatia and Turkey:
start of accession negotiations in Oct 2005
• The former Yugoslav Republic of Macedonia:
accession negotiations not started; status of candidate
country in Dec 2005
• Albania, Bosnia and Herzegovina and Serbia and
Montenegro (including Kosovo under UN Security
Council Resolution 1244 of 10 June 1999):
progress towards being recognised as candidates
depends on engagement in Stabilisation and Association
Process
EU Enlargement – Blessing or Curse?
Western Balkans:
Main Economic Trends
• Growth in 2004 around 4.5%, following a
slowdown in 2002-2003
• Economic stabilisation continued
• High external deficits
• Introduction of market economy
 Weak institutions
EU Enlargement – Blessing or Curse?
Western Balkans:
Main Economic Trends
EU Enlargement – Blessing or Curse?
The Stabilisation and Association
Process (SAP)
•
EU’s policy framework for the Western Balkan
countries, all the way to their eventual
accession
•
Three aims:
1. stabilisation and a swift transition to a market
economy
2. the promotion of regional cooperation
3. the prospect of EU accession
EU Enlargement – Blessing or Curse?
The Stabilisation and Association
Process (SAP)
• Instruments formulated at Zagreb Summit (Nov
2000)
• Thessaloniki Agenda (Jun 2003) introduced new
instruments
European Partnerships
Strengthened political co-operation in Common
Foreign and Security Policy
Promoting economic development
Opening of Community programmes to Western
Balkan countries
EU Enlargement – Blessing or Curse?
Conclusion
• Essential reforms concerning the labour
market and welfare system need to be
implemented in the future
• The new members benefit higher budget
allocations which need to be born by the
old and wealthy members
• Further enlargement is on its way,
delaying the realization of benefits
generated by an enlarged market
EU Enlargement – Blessing or Curse?
Conclusion
• Already now their are political, social and
cultural benefits for the EU as a whole
• Economic benefits will be reaped in the
longer term:
 enlarged market makes the EU more
competitive on a global scale
EU Enlargement – Blessing or Curse?
FDI and Developing Countries
• On average, 90% of the stock of capital in developing
countries is self financed, and this fraction was
surprisingly stable throughout the 1990s.
• The greater integration of financial markets has not
changed the dispersion of self-financing rates, and the
correlation between changes in de-facto financial
integration and changes in self financing ratios is
statistically insignificant.
EU Enlargement – Blessing or Curse?
FDI and Developing Countries
TOPIC FOR DISCUSSION
•There is no evidence of any "growth bonus" associated with
increasing the financing share of foreign savings.
•In fact, the evidence suggests the opposite: throughout the
1990s, countries with higher self-financing ratios grew
significantly faster than countries with low self-financing ratios.
•This result persists even after controlling growth for the quality
of institutions.
EU Enlargement – Blessing or Curse?
Questions?
Prof.: C. San Juan
2008
References
• The European Commission (2006). Enlargement Process.
http://europa.eu.int/comm/enlargement/index_en.htm
• Economic Policy Committee (2004). The Structural Challenges
Facing the Candidate Countries.
http://europa.eu.int/comm/economy_finance/epc/documents/20
04/candidate_countries_final_en.pdf
• Commission of the European Communities (2005). 2005
enlargement strategy paper.
http://europa.eu.int/comm/enlargement/report_2005/pdf/packag
e_v/com_561_final_en_strategy_paper.pdf
• Kvist J. (2004), Does EU Enlargement lead to a race to the
bottom? Strategic interaction among EU member states in social
policy, Journal of European Social Policy, vol. 14 (3), pp. 301318.
EU Enlargement – Blessing or Curse?
References
• http://www.euractiv.com/de/agenda2004/eu-budget-parlamentfordert-12-milliarden-euro-zusaetzlich/article-153635
• http://europa.eu.int/comm/budget/budget_glance/index_en.htm
• http://europa.eu.int/eur-lex/budget/data/D2006_VOL1/EN/nmcgrseq42960935830-3/index.html
• http://europa.eu.int/comm/budget/budget_glance/index_en.htm
• http://news.bbc.co.uk/2/hi/uk_news/politics/4078796.stm
EU Enlargement – Blessing or Curse?